Determining a real estate price index is important to entities such as buyers, sellers, real estate agents, lenders, and financial institutions that participate in a real estate marked. For example, an accurate index enables sellers to formulate realistic expectations as to the trend in values of the properties being sold and to set appropriate sales prices for those properties. Buyers, on the other hand, rely on accurate trend estimates to formulate offers for the purchase of properties. Real estate price indexes are typically created for a specific geographic level, e.g., local, regional, and national. An accurate index also enables an estimation of the market-level value of a property and loan-to-value ratio of a mortgage. Lenders and financial institutions that buy and sell mortgages may depend on these estimates to determine the value of a particular mortgage or portfolio of mortgages and the risk associated with holding such mortgages.
A repeat sale model is one method for estimating a real estate price index. One repeat sale model proposed by Bailey, Muth, and Nourse (the BMN model) specifies that the change in the logarithm price of a property over a known period of time is equal to the change in a logarithmic price index plus an error term. Another repeat sales model by Case and Shiller (the Case-Shiller model) improves the BMN method. Unlike the BMN model that assumes that the error term is independent, the Case-Shiller model assumes that the variance of the error term is a linear function of the time between sales and the Case-Shiller model is implemented in three steps. The BMN method and the improved Case-Shiller model also require a large number of calculations to manipulate data relating to a large number of properties. Therefore, in real world situations, the BMN model and Case-Shiller model require lengthy processing times and heightened computing power requirements.
What is needed, therefore, is an efficient computation method for the estimation of indices in the context of the original BMN model, the Case-Shiller method and other repeat sales models.